Prediction Markets Poised for Rapid Growth, Forecasted to Surpass $10 Billion Revenue by 2030
A recent study by Citizens Financial Group forecasts that the prediction markets industry could generate over $10 billion in annual revenue by the year 2030, fueled by growing interest and investment from institutional players.
Strong Growth Potential Highlighted by Citizens
Devin Ryan, managing director at Citizens, highlighted that prediction markets are on track to become a major and fast-expanding segment within the global financial system. He explained that their value is anchored in the basic concept that allowing investors to express their outlooks with more precision leads to greater market efficiency. This principle has similarly driven the growth of financial instruments like options and derivatives over the past five decades.
The report points out that prediction markets help resolve a key inefficiency by letting investors hedge event-specific risks directly, avoiding the broader, less targeted risks associated with traditional financial instruments. For example, binary contracts tied to economic data, regulatory developments, or merger results can provide more accurate hedging compared to sector ETFs or index options.
Such products could enable event-focused hedge funds to target deal outcomes or regulatory decisions without exposure to market beta or interest rate duration risks. Macro funds might use these contracts for protecting against inflation figures or policy moves, while quantitative trading firms could incorporate predictive probabilities as valuable inputs in their models. Rather than replacing existing derivatives, these contracts are expected to expand hedging opportunities by lowering basis risk.
Challenges Remain Before Full Market Maturation
Despite the promising outlook, regulatory hurdles pose significant challenges, particularly with inconsistent rules between federal and state authorities in the United States. Several states have enacted strict policies limiting or banning sports-related prediction markets. For instance, a recent court ruling added uncertainty about the legal status of these platforms in Massachusetts, reflecting broader governmental resistance that impedes growth for firms in this sector.
Other near-term obstacles highlighted by Citizens include liquidity fragmentation, concerns over insider information, and ambiguity in determining event outcomes. These hurdles mirror past obstacles faced by financial innovations like listed options, ETFs, and credit default swaps, which initially met with skepticism before becoming fundamental market components. The report suggests that prediction markets are undergoing a similar evolution, starting with retail users and progressing towards involvement from market makers, clearer regulatory frameworks, and full integration into institutional finance.
In conclusion, while challenges remain, Citizens predicts that prediction markets will shift from a niche speculative tool to a widely accepted financial instrument, supported by increasing investments from both digital asset platforms and traditional financial institutions.
